Usually when a business is professionally valued, owners and managers immediately check out the bottom line to see what the company is worth. They may pay little attention to the reasons behind the final number, especially if the report was prepared for internal planning or financial reporting purposes. But it’s a good idea to take a closer look at the analyses involved, and find out the reasons for the value.
Why the Analyses Matter
Valuation reports should be always be written language that is clear and easy to understand so that the reader can comprehend the concepts. Sometimes the valuator will deliver the report in person and review it with the client so they may answer any questions.
This ensures that the valuation is based on correct information. Any mistakes or omissions can be revised one last time. Also, meeting with the professional valuator can show ways that owners and managers can help maintain and even grow the company’s value in the future.
What Valuation Reports Cover
The American Institute of Certified Public Accountants business valuation standard (VS Section 100) provides a useful roadmap for valuation reports. Here are some of the key things to review to get the most from the valuation report.
Non-financial Information. The valuation report will discuss qualitative information needed to understand the subject company, including its: history, organizational structure including management team, marketing and sales strategies, and details of the equity ownership interests.
The appraisal reports may identify opportunities to add value if acted upon. By the same token, they also may show risks and threats that need to be dealt with to preserve value.
Financial Information and Analysis. Appraisers will look at a subject company’s historical financial information and compare it with similar businesses. This will probably include a few different analyses like ratio, common-sized financial statement and time series. This allows business owners to see the company’s position in the market, as well as set goals.
Appraisers may also use the company’s historic financial data to estimate future cash flow. In turn, the valuation report can serve as a starting point for future budget and business plans
Valuation Techniques. Typically there are three approaches to valuing a business: the cost (or asset-based), market and income approaches. There are various methods under each approach. When reviewing this section of a valuation report, the business owner should understand why the appraiser used certain methods and not others.
Valuation Adjustments. The most common adjustments to an appraiser’s preliminary value estimate are for lack of control and marketability. When considering this part of the report, it’s important to understand what these valuation discounts are and why they did (or did not) apply to the business. Some other types of adjustments include key person discounts and swing vote premiums. Business owners and manager should ask the valuator for details if they see this type of discount on the report.
Non-operating Assets and Liabilities. Some companies have assets and liabilities that are not used in normal business operations. Or they may have excess or deficit operating assets compared to other companies in similar industries. Appraisers may need to add non-operating and excess assets to their preliminary value estimates, or subtract non-operating liabilities and deficit operating assets.
Industry and Economy. Appraisers look at external conditions in the company’s industry and the economy in general when preparing a valuation report. This section explains how industrial and economic trends relate specifically to the subject company.
Why You Should Speak Up
Appraisers can provide an objective outside view on how your business runs, and how it may be improved. But no one knows a business better than its owners and managers. When an appraiser discusses the analyses underlying their findings, the business owner should be sure to ask questions and discuss the numbers. Doing so will strengthen both parties’ understanding of how the business operates and what ultimately drives its value.
Find out more about valuations from Filler & Associates.